Big Boy Barrels Through
One of the world’s largest steam engine trains, Union Pacific’s “Big Boy No. 4014”, passed through Philadelphia this week on its coast to coast “America 250” tour. An impressive sight to see. Twenty-five Big Boy trains were commissioned exclusively for Union Pacific# Railroad, the first of which was delivered in 1941. These massive locomotives were built to haul heavy equipment in support of the war effort, measuring 133 feet long and weighing 1.2 million pounds. The Big Boy is a lumbering machine that runs on fuel oil with a little help from diesel from time to time. This is analogous to our economy, which is currently staying on track at a moderate cruising speed with continued fuel from consumer spending and corporate investment. However, global shipping bottlenecks and volatile energy prices along with potentially higher interest rates continue to pose risks that could put a brake on the economic inertia.
Mag 7 or Lag 7
The S&P 500 and technology-heavy Nasdaq indices declined in the first quarter, but rebounded in the second quarter. Digging deeper, however, the Magnificent Seven technology stocks (“Mag 7”) have turned into the “Lag 7”. While highfliers for several years, these stocks declined by about 9% in the first quarter. They were still down about 2.5% as a group through the end of June. During the first half of the year, for example, Microsoft# declined 22% and Meta Platforms# declined 14%. On the plus side, Apple gained over 6% and Alphabet# gained nearly 13%. As of this week, nearly two thirds of the S&P 500 Technology stocks are trading in bear market territory. Semiconductor stocks, and memory-related producers as a subset, more than doubled since the start of the year until peaking in late June. Expectations had also been running hot. Samsung’s better than expected second quarter results, published late Monday, were not good enough for investors. This triggered another round of technology stock selling on concerns over high valuations.
Riding the Rails
Rail transportation indicators can be important guideposts as freight rail accounts for around 40% of long-distance ton-miles, more than any other mode of transportation. Looking at it another way, if railroads did not move freight in the United States, it would take more than 80 million additional trucks traveling on public roadways. It would also take up to four times more fuel than rail to handle the freight. If we look at recent rail traffic data, industrial products led an overwhelmingly strong week for U.S. freight on the back of increasing manufacturing output. The Association of American Railroads said total U.S. rail traffic for the week ending June 27 was up 7% from the same week a year ago. For the first 25 weeks of 2026, U.S. railroads hauled cumulative volume over 3% higher than the prior year period. Total combined traffic of over 12 million carloads, including intermodal unit traffic, was also up 3.3% over the prior year. The consumption portion of the economy appears to be steady as the rail traffic data bears out.
No School Like the Old School
The Bank for International Settlements published its annual risk report last week and warned that market reliance on AI spending carries financial stability risks similar to the various investment boom cycles of the past. That is not new news, but disappointment in AI returns could trigger a pullback in financing and turn the capital expenditure boom into a bust. Given other concerns tied to inflation, the Middle East conflict and the impending midterm elections, it is no wonder market volatility has increased. That leaves the market in a precarious position heading into the start of the second quarter earnings season next week, with banks expected to kick things off with solid gains. Even considering these concerns, the S&P 500 is trading within a percent of its all-time high.
Old school stocks, meanwhile, are now back in favor. Financials have outpaced the S&P 500 Index over the past month, rising more than 7%, with industrials and health care stocks also outperforming. The Dow Jones Industrial Average is up nearly 5% over the past month, having topped the 50,000 mark in late May, and decidedly non-tech stocks such as Johnson & Johnson#, Coca-Cola# and Bank of America# hit record highs this week. This quarter could either underscore the bull case for tech stocks over the back half of the year or test investor patience for long-awaited profits from the artificial intelligence boom and keep the rotation into other sectors rolling along. Stock market futures are indicated lower this morning on renewed Middle East tensions.
Actor Kevin Bacon is footloose today at 68, and comedian Sebastian Maniscalco turns 53.
Christopher Crooks, CFA®, CFP® 610-260-2219